<PAGE> 1
JOHN HANCOCK
TAX-FREE BOND
FUND
ANNUAL REPORT
December 31, 1994
[LOGO]
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
Back Cover
In upper left corner, return address: John Hancock Tax-Free Bond Fund, John
Hancock Funds Shareholder Services, P.O. Box 9656, Providence, RI 02940-9656.
In upper right corner, postage information: Bulk Rate U.S. Postage Paid Permit
No. 6011, Houston, Texas. In lower left corner, 3/8" x 3/8" John Hancock Funds
logo. A box sectioned in quadrants with a triangle in upper left, a circle in
upper right, a cube in lower left and a diamond in lower right.
<PAGE> 2
Chairman's Message
Page 1
A 2" x 2 7/16" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, centered at top of page with copy wrapped around photo.
Dear Shareholders,
On behalf of our nearly 700 associates, I'm delighted to welcome you to John
Hancock Funds. As you all know, Transamerica Fund Management Company was
acquired by John Hancock Funds on December 22, 1994, following a favorable
shareholder vote. At that time, all of the Transamerica mutual funds became
part of the John Hancock family of funds.
We're excited about the opportunities this acquisition will bring to
shareholders. The combined firms form a larger, more competitive organization
with more than $13 billion in assets under management and more than 1 million
shareholders. Now with 50 open-end funds, 8 closed-end funds and a full array
of retirement and private account services, John Hancock Funds offers you a
broader selection of investment choices to meet your long-term financial needs.
What's more, the union of the John Hancock and Transamerica investment teams
gives you access to some of the top talent in the industry.
The Transamerica name is changing, but the commitment to serving you as a
valued shareholder isn't. Here at John Hancock Funds, our motto is: "We invest
in quality first." It has to do with the way we invest your money and the way
we work with you. Not only do we strive to ensure that your investments are
well managed, we also take pride in providing the highest quality customer
service. We can't guarantee investment performance; nobody can. The quality of
our service, however, depends totally on us. That is something that we can
guarantee.
In mid-May, we anticipate that all of the Transamerica funds will be fully
integrated into John Hancock's internal shareholder service organization, John
Hancock Investor Services. At that time, not only will you gain exchange
privileges into all John Hancock funds, but your account will be handled by one
of the top-rated service organizations in the industry. To show you how
seriously we take our commitment to quality, you will have access to our
service guarantee. If we make an error in processing a transaction in your
account, we will deposit $25 into it. Or, if you have a retirement account, we
will waive the annual fee.
We value your business and look forward to serving your investment needs in
the years to come.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
John Hancock Funds
1
<PAGE> 3
BY THE PORTFOLIO MANAGEMENT TEAM
JOHN HANCOCK TAX-FREE BOND FUND
RISING INTEREST RATES HIT MUNICIPAL BONDS BUT
LONG-TERM OUTLOOK STILL POSITIVE
Under most circumstances, the combination of a 44% drop in the supply of
municipal bonds and higher tax rates would lead to higher prices for tax-free
bonds. During 1994, however, when the Federal Reserve Board raised short-term
interest rates in an attempt to head off inflation and slow economic growth,
the bond market dramatically raised long-term rates. The yield on the 30-year
Treasury bond climbed from 6.26% at the beginning of 1994 to 7.84% at the
year's end. The increase in Treasury yields led to the worst year in municipal
bonds since 1987. The Bond Buyer 20, a municipal bond index, rose in yield from
5.28% to 6.74%. Since yields and bond prices move inversely, the price on
municipal bonds dropped accordingly.
A tax provision in the 1993 budget added an extra measure of illiquidity to
the municipal market. Most municipal bonds are originally issued at a discount
to par (or the face value of the bond). The rise in yields and corresponding
drop in prices caused a further decline in price for these bonds. Purchasing
bonds at a price significantly lower than the original issue discount price can
create taxable income for buyers when the bonds appreciate back to the original
discount price. As a result, prices dropped for these bonds during the
reporting period.
RISE IN RATES HURT FUND PERFORMANCE
Few municipal bond funds escaped the market's downturn, and John Hancock
Tax-Free Bond Fund was no exception. For the 12 months ended December 31, 1994,
Class A and Class B Shares had total returns of -9.28% and -10.05%,
respectively, at net asset value. The average municipal bond fund was down
- -6.53%, according to Lipper Analytical Services.*
Our strategy of maintaining a long maturity caused the Fund to underperform
its peers. A longer maturity allows the Fund to pay a higher yield.
Shareholders who receive dividend checks earn a higher level of income than
they would from funds with shorter maturities; shareholders who reinvest
dividends may experience a higher total return over time. Although there will
be times, like the recent reporting period, when we will underperform, we
believe that maintaining a long maturity will help us to outperform over the
long term. As of December 31, 1994, the average maturity was 24.9 years.
The Fund continued to offer a competitive yield during the period.
According to Lipper, the 12-month yield for Class A Shares was 6.10% and 5.30%
for Class B Shares, versus a general municipal bond fund category average of
5.59%.* Yield, as calculated by Securities and Exchange Commission standards,
was 6.13% for Class A Shares and 5.68% for Class B Shares for the 30 days ended
December 31, 1994.**
During the 12-month period, the Fund paid $0.573 per share distributions
for Class A Shares and $0.497 for Class B Shares. Please remember that a
portion of the Fund's distributions may be subject to federal income
2
<PAGE> 4
taxes, state income taxes or the alternative minimum tax. In January 1994, the
Fund distributed less than $0.01 per share of taxable gains that were carried
over from tax year 1993.
STEADY STRATEGY
We manage for high tax-free yields and preservation of capital over the long
term. We maintained that objective, making minor changes in response to the
interest-rate environment.
We reduced the percentage of alternative minimum tax bonds and non-rated
securities during the period. We believe that these bonds will probably not
perform as well as other issues when the municipal bond market rebounds. We
upgraded the credit quality of the Fund for the same reason.
We also increased our call protection. By buying bonds that cannot be
called (redeemed early), we locked in higher yields. As of December 31, 1994,
the portfolio's average call date was June 11, 2006.
We continued our strategy of seeking out the most attractively valued bonds
by moving between credit qualities. We invested in lower-quality issues when we
felt we were being appropriately compensated for the added risk. By the same
token, we sold high-quality bonds that we believed were overvalued.
In many instances, holdings, such as bonds issued by Clark County, Nevada
and Skowhegan, Maine, received higher credit ratings from established ratings
agencies which typically would have led to higher prices. However, the rise in
interest rates offset the benefit of the higher ratings.
Our portfolio remained well diversified with 64 issues in 12 market sectors
as of December 31, 1994.
OUTLOOK
Looking forward, we remain cautiously optimistic about returns in municipal
bonds. Total issuance in 1995 should be very close to 1994's total of $160
billion. With approximately $300 billion out of the $1.2 trillion municipal
bond market either maturing or being called, there should be periods when
demand will exceed supply. Demand from individuals should remain strong due to
higher after-tax yields. Currently, yields on 30-year, AAA-rated municipals are
approximately 81% of the 30-year Treasury bond, which more than compensates for
the possibility of lower tax rates being discussed by the new Congress.
While demand from trust and insurance buyers should remain moderate due to
higher short-term yields, demand from mutual funds should improve from 1994
levels. Should interest rates stabilize or the perception among investors
change to a stable long-term interest-rate environment, net sales of mutual
funds will once again drive municipal prices higher.
We believe that the economy will slow to its historic norm of between 2.5%
to 3.0% annual gross domestic product growth by the middle of 1995. Until that
happens, the Federal Reserve may continue to raise short-term interest rates.
Consumers seem to have satisfied their pent-up demand which, together with
higher short-term rates, should cool the economy. We expect long-term rates to
move lower in 1995 in response to a slower economy. When this happens,
municipal bond fund investors should see the returns on their investments begin
to improve.
Short supply, rising demand, slower economic growth and lower long-term
rates paint a compelling picture for investing in municipal bonds for the long
term.
* Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance would be
lower. Also, the Fund reimburses expenses. Without expense reimbursement, yield
and total return would have been lower. Total return would have been -13.71%
and -15.15% for Class A and Class B Shares, respectively, at net asset value
for the 12 months ended December 31, 1994.
** The SEC yield reflects net investment income earned by the Fund. Without
expense reimbursement, SEC yields would have been 6.02% and 5.57% for Class A
and Class B Shares, respectively.
3
<PAGE> 5
Page 4
A box with heading "Top Five States" at the top of the first (left) column.
Box lists the following: 1. Illinois, 14.86%, 2. Texas, 11.71% 3.
Pennsylvania, 10.09% 4. Georgia, 9.42% 5. Michigan, 7.01%. Footnote below
states: "As a percentage of total net assets on December 31, 1994."
Page 4
Table entitled "Scorecard" following the "Top Five States." The header for the
left column is "Investments;" the header for the right column is "Recent
performance...and what's behind the numbers." The first listing is Clark
County, NV followed by a down arrow and the phrase "Credit rating upgrade
offset by higher rates." The second listing is Jacksonville Electric, FL
followed by a down arrow and the phrase "Higher interest rates." The third
listing is Skowhegan, ME followed by a down arrow and the phrase "Credit
rating upgrade offset by higher rates."
Page 4
Bar chart with heading "Fund Performance" following the "Scorecard."
Under the heading is the note: "For the year ended December 31, 1994." The
horizontal chart is scaled in increments of 4% from -12% at the left and 12% at
the right. Within the chart, there are three solid bars. The first represents
the -9.28% total return for John Hancock Tax-Free Bond Fund Class A. The second
represents the -10.05% total return for John Hancock Tax-Free Bond Fund Class
B. The third represents the -6.53% total return for the Lipper Average
Municipal Bond Fund. The footnote below states: "Total returns for John Hancock
Tax-Free Bond Fund are at net asset value with all distributions reinvested.
The average municipal bond fund is tracked by Lipper Analytical Services.* See
the following page for historical performance information."
4
<PAGE> 6
JOHN HANCOCK TAX-FREE BOND FUND
LONG-TERM PERFORMANCE REVIEW
If you had invested $10,000 in John Hancock Tax-Free Bond Fund on January 5,
1990 (Class A inception) and reinvested all dividends, your investment, upon
redemption, would have grown to $13,439 as of December 31, 1994.* Class B
Shares, which were introduced on December 31, 1991, would have grown to
$11,025.
The chart compares the Fund's performance to the Lehman Brothers Municipal
Bond Index and the Consumer Price Index (CPI). The Lehman Brothers index is an
unmanaged index of municipal securities that are similar, but not identical, to
the bonds in the Fund's portfolio. The CPI is a commonly used gauge of the rate
of inflation.
Returns for Class A Shares (including the Fund's average annual total
returns for the one-year and since inception periods ended December 31, 1994,
as shown in the inset box) reflect the maximum 4.75% sales charge. Returns for
Class B Shares (for one-year and since inception, as shown in the box) reflect
expenses and the applicable contingent deferred sales charge which declines
yearly as follows: 5%, 4%, 3%, 3%, 2%, 1%, 0%. Return for the Lehman index does
not reflect a sales charge. If you were to purchase individual bonds
represented in this index, any sales charges that you would pay would reduce
your return accordingly.
Your investment return will fluctuate so that your shares, when redeemed,
may be worth more or less than the original cost. Performance representing past
performance is no guarantee of future results.
* Returns include the effect of expense reimbursement which, if excluded, would
have caused performance to be lower. Without expense reimbursement, Class A
return would have been -13.71% for the one-year period and 5.74% since
inception. Class B return would have been -15.15% for the one-year period and
3.11% since inception.
Page 5
Boxed line chart at top right corner of page with heading "John Hancock Tax-
Free Bond Fund A vs. Lehman Brothers Muni Bond Index." Note below states"
"Growth of $10,000 Investment Since Inception, 1/5/90 - 12/31/94." The chart
is scaled in $1,000 increments from $9,000 to $17,000 at the left. The chart
is scaled at the bottom from 1/5/90 at the left to 1994 at the right. Within
the chart are three lines. The solid line represents the value of a
hypothetical $10,000 investment in the John Hancock Tax-Free Bond Fund Class A
on January 5, 1990 including 4.75% front load sales charge that is equal to
$13,439 on December 31, 1994. The dashed line represents the value of a
hypothetical $10,000 investment in the Lehman Brothers Muni Bond Index on
January 5, 1990 and is equal to $13,895 on December 31, 1994. The dotted line
represents a hypothetical $10,000 investment in the Consumer Price Index on
January 5, 1990 and is equal to $11,871 on December 31, 1994. In the upper
left corner of the chart, is a box with the heading "Average Annual Total
Return." Text for the box reads from left: "1 year, 5 year, Inception" on the
first line and from left on the second line,
"-13.61%, N/A and 6.11%."
Page 5
Boxed line chart at top right corner of page with heading "Class B Shares."
Note below states" "Growth of $10,000 Investment Since Inception, 12/31/91 -
12/31/94." The chart is scaled in $1,000 increments from $10,000 to $14,000 at
the left. The chart is scaled at the bottom from 12/31/91 at the left to 1994
at the right. Within the chart are three lines. The solid line represents the
value of a hypothetical $10,000 investment in the John Hancock Tax-Free Bond
Fund Class B on December 31, 1991 including the applicable 5.00% contingent
deferred sales charge and expenses and is equal to $11,025 on December 31,
1994. The dashed line represents the value of a hypothetical $10,000
investment in the Lehman Brothers Muni Bond Index on December 31, 1991 and is
equal to $11,584 on December 31, 1994. The dotted line represents a
hypothetical $10,000 investment in the Consumer Price Index on December 31,
1991 and is equal to $10,856 on December 31, 1994. In the upper left corner of
the chart, is a box with the heading "Average Annual Total Return." Text for
the box reads from left: "1 year, 5 year, Inception" on the first line and
from left on the second line, "-15.05%, N/A and 3.31%."
5
<PAGE> 7
SCHEDULE OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
LONG-TERM MUNICIPAL
OBLIGATIONS-- 96.51%
ALABAMA--0.50%
Moundville Industrial
Development Board
Revenue Refunding Bonds
6.750% due 12/01/11...................... $ 1,000,000 $ 920,000
ARIZONA--1.18%
Arizona Health Facilities
Authority Hospital
System Revenue
Refunding Bonds
8.200% due 06/01/21...................... 2,150,000 2,179,563
CALIFORNIA--6.99%
California Statewide
Community Development
Corp. Revenue
Certificates of
Participation
6.500% due 08/01/22...................... 2,750,000 2,440,625
Duarte City of Hope
Medical Center
Certificates of
Participation
6.250% due 04/01/23...................... 4,060,000 3,379,950
Fontana Special Tax
Community Facilities
District Bonds
8.400% due 04/01/15...................... 500,000 411,875
Saddleback Valley Unified
School District
Community Facilities
District Bonds
7.750% due 09/01/16...................... 2,000,000 1,952,500
San Bernardino County
Certificates of
Participation
5.500% due 08/01/17...................... 5,000,000 3,875,000
Santa Cruz County Public
Financing Revenue Bonds
6.100% due 09/01/15...................... 1,000,000 850,000
-----------
12,909,950
COLORADO--2.53%
Denver City & County
Airport Revenue Bonds
Series A
7.250% due 11/15/25...................... 2,000,000 1,815,000
7.500% due 11/15/23...................... 3,100,000 2,855,875
-----------
4,670,875
DISTRICT OF
COLUMBIA--0.54%
District of Columbia
National Public Radio
Revenue Bonds
7.700% due 01/10/23...................... 1,000,000 1,006,250
FLORIDA--5.07%
Jacksonville Electric
Authority Revenue
Refunding Bonds
5.250% due 10/01/28...................... 9,000,000 7,323,750
Northern Palm Beach
County Water Control
District Bonds
6.625% due 11/01/13...................... 1,470,000 1,354,237
6.750% due 11/01/07...................... 725,000 687,844
-----------
9,365,831
</TABLE>
6
<PAGE> 8
SCHEDULE OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ----------- -----------
<S> <C> <C>
GEORGIA--9.42%
Georgia Municipal Electric Authority
Power Revenue Refunding Bonds
5.500% due 01/01/20...................... 5,840,000 4,964,000
5.700% due 01/01/19...................... 5,000,000 4,381,250
7.250% due 01/01/24...................... 2,000,000 2,150,000
Monroe County
Development Authority Pollution
Control Revenue Bonds
6.800% due 01/01/12...................... 1,000,000 981,250
Savannah Hospital
Authority Revenue
Refunding Bonds
7.000% due 01/01/23...................... 5,470,000 4,923,000
----------
17,399,500
ILLINOIS--14.86%
Chicago Skyway Toll Bridge
Revenue Refunding Bonds
6.750% due 01/01/17..................... 2,000,000 1,857,500
Du Page County
General Obligation Bonds
5.600% due 01/01/21..................... 10,000,000 8,575,000
Illinois Development
Finance Authority
Pollution Control
Revenue Refunding Bonds
5.850% due 01/15/14..................... 3,000,000 2,512,500
Illinois Development
Finance Authority
Revenue Refunding Bonds
8.500% due 02/01/15..................... 2,150,000 2,233,313
Illinois Educational
Facilities Authority
Revenue Bonds
6.125% due 12/01/18..................... 3,065,000 2,620,575
6.875% due 12/01/17..................... 1,300,000 1,213,875
Illinois Health Facilities
Authority Revenue
Refunding Bonds
6.000% with various
maturities to 09/01/19................ 3,800,000 3,237,250
6.125% due 08/15/20..................... 4,565,000 3,657,706
6.750% due 12/01/08..................... 1,640,000 1,553,900
----------
27,461,619
IOWA--0.73%
Ottumwa Hospital Facility
Revenue Refunding and
Improvement Bonds
6.000% due 10/01/18..................... 1,700,000 1,357,875
LOUISIANA--1.41%
LaFourche Parish Hospital
Service Revenue Bonds
6.000% due 10/01/23..................... 1,000,000 775,000
West Feliciana Parish
Pollution Control
Revenue Bonds
7.000% due 11/01/15..................... 2,000,000 1,840,000
----------
2,615,000
MAINE--1.71%
Skowhegan Pollution
Control Revenue
Refunding Bonds
5.900% due 11/01/13..................... 3,710,000 3,158,137
MASSACHUSETTS--1.97%
Health & Educational
Facilities Authority
Revenue Bonds
6.625% due 04/01/12..................... 4,000,000 3,640,000
</TABLE>
7
<PAGE> 9
SCHEDULE OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ --------- ------------
<S> <C> <C>
MICHIGAN--7.01%
Dickinson County
Economic Development Corp.
Pollution Control Revenue Bonds
5.850% due 10/01/18 . . . . . . . . . . 3,000,000 2,497,500
Kalamazoo Hospital
Finance Authority Hospital Facility
Revenue Refunding Bonds
6.375% due 05/15/17 . . . . . . . . . . 2,000,000 1,837,500
Michigan State Hospital
Finance Authority
Revenue Refunding Bonds
6.500% due 08/15/18 . . . . . . . . . . 3,500,000 3,163,125
8.250% due 07/01/12 . . . . . . . . . . 2,250,000 2,337,188
Michigan State Housing
Development Authority Rental Housing
Revenue Bonds
Zero coupon due 10/01/13(A) . . . . . . 5,100,000 3,111,000
------------
12,946,313
MISSISSIPPI--2.55%
Washington County
Pollution Control
Revenue Refunding Bonds
7.000% due 04/01/22 . . . . . . . . . . 5,000,000 4,712,500
NEVADA--4.54%
Clark County Industrial
Development Revenue Bonds
6.500% due 12/01/33 . . . . . . . . . . 10,000,000 8,387,500
NEW HAMPSHIRE--0.60%
New Hampshire Higher
Educational & Health Facilities
Authority Revenue Refunding Bonds
5.375% due 01/01/15 . . . . . . . . . . 1,300,000 1,105,000
NEW JERSEY--2.40%
New Jersey Turnpike Authority Revenue
Refunding Bonds
6.500% due 01/01/16 . . . . . . . . . . 4,500,000 4,438,125
NEW YORK--1.02%
New York State Local
Government Assistance Corp.
General Obligation Bonds
6.250% due 04/01/18 . . . . . . . . . . 2,000,000 1,882,500
NORTH CAROLINA--0.93%
North Carolina Eastern Municipal
Power Agency Power System
Revenue Refunding Bonds
6.000% due 01/01/22 . . . . . . . . . . 2,000,000 1,720,000
OHIO--3.04%
Ohio State Air Quality Development
Authority Revenue Bonds
6.250% due 12/01/20 . . . . . . . . . . 4,500,000 3,976,875
Student Loan Funding Corp. of Cincinnati
Revenue Bonds
8.875% due 08/01/08 . . . . . . . . . . 1,620,000 1,632,150
------------
5,609,025
</TABLE>
8
<PAGE> 10
SCHEDULE OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
FACE
ISSUER AMOUNT VALUE
- ------ ------ -----
<S> <C> <C>
PENNSYLVANIA - 10.09%
Allegheny County
Industrial Development
Authority Revenue
Refunding Bonds
6.700% due 12/01/20........... 5,000,000 4,556,250
Cumberland County
Municipal Authority First
Mortgage Revenue Bonds
6.800% due 11/15/14........... 3,000,000 2,636,250
Montgomery County
Redevelopment Authority
Multi-Family Housing
Revenue Bonds
6.375% due 07/01/12........... 2,000,000 1,782,500
Philadelphia Hospitals &
Higher Education
Facilities Authority
Revenue Bonds
7.000% due 08/15/12........... 1,250,000 1,162,500
8.625% due 07/01/21........... 2,700,000 2,598,750
Philadelphia Water & Sewer
Revenue Bonds Series 16
7.500% due 08/01/10........... 3,000,000 3,120,000
Scranton-Lackawanna
Health & Welfare
Authority Revenue Bonds
7.600% due 07/15/20........... 3,000,000 2,786,250
----------
18,642,500
SOUTH CAROLINA - 0.36%
Lee County Industrial
Revenue Bonds
7.000% due 09/15/13........... 750,000 671,250
TEXAS - 11.71%
Dallas-Fort Worth
International Airport
Facility Improvement
Corp. Revenue Bonds
7.250% due 11/01/30........... 10,250,000 9,378,750
Ector County Hospital
District Revenue Bonds
7.300% due 04/15/12........... 4,000,000 3,945,000
El Paso International
Airport Revenue
Refunding Bonds
7.750% due 03/01/12........... 1,410,000 1,357,125
Harris County Industrial
Development Corp.
Revenue Refunding Bonds
6.625% due 02/01/24........... 1,000,000 920,000
Sam Rayburn Municipal
Power Agency Power
Supply System Revenue
Refunding Bonds
6.250% due 10/01/17........... 7,100,000 6,043,875
----------
21,644,750
UTAH - 1.01%
Carbon County Solid Waste
Disposal Revenue
Refunding Bonds
9.000% due 07/01/12........... 1,000,000 1,023,750
Davis County Solid Waste
Management & Energy
Recovery Revenue
Refunding Bonds
6.125% due 06/15/09........... 1,000,000 838,750
----------
1,862,500
</TABLE>
9
<PAGE> 11
SCHEDULE OF INVESTMENTS
Continued
<TABLE>
<Captions>
FACE
ISSUER AMOUNT VALUE
- ------ --------- ------------
<S> <C> <C>
VIRGINIA - 2.38%
Pittsylvania County
Industrial Development Authority Revenue Bonds
7.550% due 01/01/19 ......................... 4,500,000 4,393,125
WASHINGTON - 0.88%
Washington State Public
Power Supply System Nuclear Project #3
Revenue Refunding Bonds
5.500% due 07/01/18 ......................... 2,000,000 1,625,000
WISCONSIN - 1.08%
Wisconsin Health &
Educational Facilities Authority Revenue
Refunding Bonds
7.000% due 02/15/22 ......................... 2,115,000 2,003,962
------------
TOTAL LONG-TERM MUNICIPAL OBLIGATIONS
(Cost $194,770,622) .............................. 178,328,650
------------
TOTAL INVESTMENTS - 96.51%
(Cost $194,770,622) ............................. 178,328,650
CASH AND OTHER ASSETS,
LESS LIABILITIES - 3.49% ........................ 6,452,992
------------
NET ASSETS, at value, equivalent to $9.39
per share for 12,203,457 Class A Shares
($.01 par value) outstanding and $9.38
per share for 7,485,326 Class B Shares
($.01 par value) outstanding - 100.00% ........ $184,781,642
============
</TABLE>
(A) LIBOR range floater.
See Notes to Financial Statements.
10
<PAGE> 12
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
ASSETS
<TABLE>
<S> <C> <C>
Investments at value (cost $194,770,622) ............................... $178,328,650
Cash ................................................................... 241,707
Receivable for:
Investments sold ..................................................... $7,132,365
Interest ............................................................. 4,038,531
Shares sold .......................................................... 52,268 11,223,164
----------
Other assets ........................................................... 60,206
------------
Total Assets ......................................................... 189,853,727
LIABILITIES
Payable for:
Investments purchased ................................................ 4,092,571
Dividends ............................................................ 387,780
Shares repurchased ................................................... 342,380 4,822,731
----------
Payable to Investment Adviser for:
Distribution expenses ................................................ 117,109
Management fees ...................................................... 74,327
Administrative service fees .......................................... 12,556 203,992
----------
Other liabilities ...................................................... 45,362
------------
Total Liabilities ..................................................... 5,072,085
------------
NET ASSETS, at value, equivalent to $9.39 per share for 12,203,457
Class A Shares ($.01 par value) outstanding and $9.38 per share for
7,485,326 Class B Shares ($.01 par value) outstanding ................. $184,781,642
============
</TABLE>
See Notes to Financial Statements.
11
<PAGE> 13
STATEMENT OF OPERATIONS / STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
<S> <C> <C>
INVESTMENT INCOME
Interest.......................... $ 13,590,420
EXPENSES
Management fees................... $1,136,532
Distribution expenses
(see Note D)..................... 859,051
Transfer agent fees............... 189,396
Administrative service fees....... 116,742
Custodian fees.................... 67,118
Registration fees................. 57,702
Audit and legal fees.............. 34,502
Trustees' fees and expenses....... 26,968
Shareholder reports............... 18,343
Organization costs................ 4,937
Miscellaneous..................... 26,680
Less: Expense reimbursement....... (232,531) 2,305,440
---------- ------------
NET INVESTMENT INCOME............. 11,284,980
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS
Net realized loss on investments.. (7,349,795)
Net change in unrealized
depreciation of investments...... (25,666,689)
------------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS................... (33,016,484)
------------
DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS.................. $(21,731,504)
============
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income............. $ 11,284,980 $ 8,664,655
Net realized gain (loss) on
investments...................... (7,349,795) 7,465,369
Net change in unrealized
appreciation (depreciation)
of investments................... (25,666,689) 5,108,175
------------ ------------
Increase (decrease) in net
assets resulting from
operations....................... (21,731,504) 21,238,199
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income -
Class A.......................... (7,588,474) (6,933,021)
Class B.......................... (3,611,510) (1,725,276)
Net realized gain on
investments -
Class A.......................... -- (5,248,953)
Class B.......................... -- (2,162,925)
------------ ------------
Total distributions to
shareholders..................... (11,199,984) (16,070,175)
SHARE TRANSACTIONS
Increase in shares outstanding.... 24,808,198 69,942,033
------------ ------------
Increase (decrease) in
net assets........................ (8,123,290) 75,110,057
NET ASSETS
Beginning of year................. 192,904,932 117,794,875
------------ ------------
End of year....................... $184,781,642 $192,904,932
============ ============
Undistributed Net Investment
Income........................... $ 84,996 $ 0
============ ============
</TABLE>
See Notes to Financial Statements.
12
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------------------------- ---------------------------
PERIOD
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31,
--------------------------------------- DECEMBER 31, ---------------------------
1994(1) 1993 1992 1991 1990(2) 1994(1) 1993 1992(3)
-------- -------- ------- ------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share income and capital changes for a
share outstanding during each period:
Net asset value, beginning of period . . . . . $ 10.96 $ 10.47 $ 10.24 $ 9.90 $ 10.00 $ 10.96 $ 10.47 $ 10.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income . . . . . . . . . . . . 0.58 0.62 0.67 0.69 0.71 0.50 0.54 0.59
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . . . . (1.58) 0.93 0.42 0.72 (0.13) (1.58) 0.93 0.42
-------- -------- ------- ------- ------- ------- ------- -------
Total from Investment Operations . . . . . (1.00) 1.55 1.09 1.41 0.58 (1.08) 1.47 1.01
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . (0.57) (0.62) (0.68) (0.68) (0.68) (0.50) (0.54) (0.60)
Distributions from realized gains . . . . . . -- (0.44) (0.18) (0.39) -- -- (0.44) (0.18)
-------- -------- ------- ------- ------- ------- ------- -------
Total Distributions . . . . . . . . . . . (0.57) (1.06) (0.86) (1.07) (0.68) (0.50) (0.98) (0.78)
-------- -------- ------- ------- ------- ------- ------- -------
Net asset value, end of period . . . . . . . . $ 9.39 $ 10.96 $ 10.47 $ 10.24 $ 9.90 $ 9.38 $ 10.96 $ 10.47
======== ======== ======= ======= ======= ======= ======= =======
TOTAL RETURN(4) . . . . . . . . . . . . . . . (9.28)% 15.15% 10.97% 14.78% 6.04% (10.05)% 14.30% 10.15%
======== ======== ======= ======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net assets . . . 0.96% 0.95% 0.96% 0.98% 1.25% 1.71% 1.70% 1.73%
Ratio of expense reimbursement to
average net assets . . . . . . . . . . . . (0.11)% (0.17)% (0.30)% (0.38)% (0.85)% (0.11)% (0.17)% (0.30)%
-------- -------- ------- ------- ------- ------- ------- -------
Ratio of net expenses to average
net assets . . . . . . . . . . . . . . . . 0.85% 0.78% 0.66% 0.60% 0.40% 1.60% 1.53% 1.43%
======== ======== ======= ======= ======= ======= ======= =======
Ratio of net investment income to average
net assets . . . . . . . . . . . . . . . . 5.72% 5.57% 6.46% 6.86% 7.09% 4.97% 4.66% 5.57%
Portfolio turnover . . . . . . . . . . . . . 107% 116% 79% 123% 64% 107% 116% 79%
Net Assets, end of period (in thousands) . . $114,539 $136,521 $99,523 $73,393 $45,437 $70,243 $56,384 $18,272
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the Investment
Adviser. Prior to this date, Transamerica Fund Management Company was the
Investment Adviser.
(2) Financial highlights,including total return, are for the period from
January 5, 1990 (date of Fund's initial offering of shares to the public)
to December 31, 1990 and have not been annualized.
(3) Per share information has been calculated using the average number of
shares outstanding.
(4) Total return does not include the effect of the initial sales charge for
Class A Shares nor the contingent deferred sales charge for Class B
Shares. Total return does include the benefit of a voluntary expense
reimbursement by the Investment Adviser. Without such benefit, the total
return would be lower.
See Notes to Financial Statements.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
John Hancock Tax-Free Bond Fund (the "Fund"), formerly Transamerica Tax-Free
Bond Fund, is a diversified, open-end management investment company registered
under the Investment Company Act of 1940, as amended. On December 16, 1994, the
shareholders of each of the mutual funds managed by Transamerica Fund
Management Company (TFMC) voted to approve new Investment Advisory contracts
with John Hancock Advisers, Inc. Each such approval was subject to the
acquisition of TFMC by The Berkeley Financial Group (known beginning January 1,
1995 as John Hancock Funds), the parent company of John Hancock Advisers, Inc.
The acquisition became effective on December 22, 1994. The Fund's name change
was also effective on this date.
The Fund offers two classes of shares to the public. Class A Shares are
subject to an initial sales charge of up to 4.75% and a 12b-1 distribution
plan. Class B Shares are subject to a contingent deferred sales charge and a
separate 12b-1 distribution plan. The following is a summary of significant
accounting policies consistently followed by the Fund.
(1) The Fund values its investments by using quotations provided by
market makers, estimates of market value, or values received from an
independent pricing service. Securities for which market quotations are not
readily available are valued at a fair value as determined in good faith by the
Fund's Board of Trustees. Short-term investments are valued at amortized cost
(original cost plus amortized discount or accrued interest).
(2) Security transactions are accounted for on the trade date. Interest
income is accrued daily. Debt premiums and original issue discounts are
amortized using the yield-to-maturity method. Discounts other than original
issue are not amortized. Realized gains and losses from security transactions
are determined on the basis of identified cost for both financial reporting and
federal income tax purposes.
(3) Income dividends are declared daily by the Fund and paid to
shareholders or reinvested at net asset value monthly. Other distributions are
recorded on the ex-dividend date and may be reinvested at net asset value.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
(4) No provision for federal income taxes has been made since it is the
Fund's intention to distribute all of its taxable income and profits to its
shareholders and to comply with the requirements applicable to regulated
investment companies and the minimum distribution requirements of the Internal
Revenue Code. At December 31, 1994, the Fund had a realized capital loss
carryforward of approximately $7,350,000, which will expire in 2002.
(5) The Fund reports custodian fees net of credits and charges
resulting from cash positions in the custodial accounts greater than or less
than the amounts required to settle portfolio transactions. For the year ended
December 31, 1994, these amounts were $11,511 and $21,380, respectively.
(6) On a daily basis, income, unrealized and realized gains and losses,
and expenses which are not class specific are allocated to each class based on
their respective relative net assets. Class specific expenses, such as
distribution expenses, are applied to the class to which they are attributed.
NOTE B--MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
From January 1, 1994 through December 21, 1994, TFMC acted as the Investment
Adviser to the Fund. On December 22, 1994, John Hancock Advisers, Inc., a
wholly-owned subsidiary of John Hancock Funds, became Investment Adviser
following the approval of the Fund's shareholders. Throughout these financial
statement notes, TFMC and John Hancock Advisers, Inc. are referred to
collectively as the "Investment Adviser", as each acted in this capacity
during the time periods noted above. The Investment Adviser has a sub-advisory
agreement with, and pays a fee to, Transamerica Investment Services, Inc. (the
"Sub-Adviser"). TFMC was, prior to December 22, 1994, and the Sub-Adviser is
presently a subsidiary of Transamerica Corporation.
The Fund's management fee is payable monthly and is calculated based on
the monthly average daily net assets of the Fund at an annual rate of 0.55%.
The Investment Adviser also provided administrative services to the
Fund pursuant to an administrative service agreement. During the year ended
December 31, 1994, the Fund paid or accrued $81,515 to the Investment Adviser
for these services.
The Investment Adviser voluntarily agreed to reimburse the Fund for all
normal operating expenses, excluding distribution expenses, in excess of 0.70%,
on an annual basis, of the Fund's average daily net assets through December 31,
1994. For the year ended December 31, 1994, the Investment Adviser reimbursed
the Fund $232,531 pursuant to this agreement.
During the year ended December 31, 1994, Transamerica Fund
Distributors, Inc., an affiliate of TFMC and
14
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE B (Continued)
principal underwriter of the Fund through December 21, 1994, and John
Hancock Funds, Inc., an affiliate of John Hancock Advisers, Inc. and principal
underwriter since December 22, 1994, retained $47,967 as their portion of the
commissions charged on sales of Class A Shares of the Fund. Throughout these
financial statement notes, Transamerica Fund Distributors, Inc. and John
Hancock Funds, Inc. are referred to collectively as the "Distributor", as
each acted in this capacity during the time periods noted above.
The Fund paid no compensation directly to any officer. Certain officers
of the Fund are affiliated with the Investment Adviser.
During the year ended December 31, 1994, the Fund paid legal fees of
$6,000 to Baker & Botts. A partner with Baker & Botts was an officer of the
Fund until December 22, 1994.
NOTE C--COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
During the year ended December 31, 1994, purchases and sales of securities,
other than short-term obligations, aggregated $239,868,213 and $214,753,366,
respectively.
At December 31, 1994, the identified cost of investments owned was the
same for both financial reporting and federal income tax purposes. At December
31, 1994, the gross unrealized appreciation and gross unrealized depreciation
of investments for federal income tax purposes were $432,034 and $16,874,006,
respectively.
NOTE D--PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Fund is
authorized under separate distribution plans to finance activities related to
the distribution of its Class A and Class B Shares (the "Class A Plan" and the
"Class B Plan," respectively). The distribution plans, together with the
initial sales charge on Class A Shares and the contingent deferred sales charge
on Class B Shares, comply with the regulations covering maximum sales charges
assessed by mutual funds distributed through securities dealers that are NASD
members.
The Class A Plan and the Class B Plan permit each class to make
payments to the Distributor up to 0.15% annually of average daily net assets
for certain distribution costs such as service fees paid to dealers, production
and distribution of prospectuses to prospective investors, services provided to
new and existing shareholders and other distribution related activities. During
the year ended December 31, 1994, the Fund made payments to the Distributor of
$200,118 or 0.15% for Class A and $109,829 or 0.15% for Class B, related to the
above activities.
The Class B Plan also permits Class B to reimburse the Distributor up
to 0.75% annually of average daily net assets for costs related to compensation
paid to securities dealers, in place of an initial sales charge to investors,
on the sale of Class B Shares. These costs are based upon a commission payment
charge of 5% of the value of Class B Shares sold (excluding shares acquired
through reinvestment), reduced by the amount of contingent deferred sales
charges (CDSC) that have been received by the Distributor on redemptions of
Class B Shares. These costs also include a charge of interest (carrying charge)
at an annual rate of 1% over the prevailing prime rate to the extent cumulative
commission payment charges, plus any previous carrying charges, less CDSC
received by the Distributor, have not been paid in full by the Fund. For the
year ended December 31, 1994, Class B reimbursed the Distributor $549,104 or
0.75% for such costs. For the year ended December 31, 1994, the Distributor
received $209,200 in CDSC.
At December 31, 1994, Class A had $46,863 and Class B had $70,246
payable to the Distributor pursuant to the above distribution plans.
NOTE E--ORGANIZATION
The Fund was organized as a Massachusetts business trust on November 13, 1989.
The Fund had no transactions between that date and January 5, 1990, the date of
the Fund's initial offering of shares to the public, other than the sale at
$10.00 per share (net asset value) of 10,000 shares to TFMC.
The organization expenses of the Fund have been deferred and are being
amortized over a period during which it is expected that a benefit will be
realized, but not longer than five years from the date of commencement of
operations.
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE F--SHARE AND RELATED TRANSACTIONS
A summary of share transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1993
-------------------------- ---------------------------
SHARES DOLLARS SHARES DOLLARS
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold--Class A............................................... 2,973,332 $ 31,232,536 4,470,385 $ 49,282,506
Shares sold--Class B............................................... 3,736,809 39,155,237 3,409,810 37,871,570
Shares issued in reinvestment of distributions--Class A............ 430,837 4,303,072 676,087 7,438,972
Shares issued in reinvestment of distributions--Class B............ 212,691 2,116,235 243,976 2,684,089
Shares redeemed--Class A........................................... (3,655,146) (36,242,204) (2,199,859) (24,479,013)
Shares redeemed--Class B........................................... (1,608,678) (15,756,678) (254,950) (2,856,091)
---------- ------------ ---------- ------------
Net increase in shares outstanding................................. 2,089,845 $ 24,808,198 6,345,449 $ 69,942,033
========== ============ ========== ============
</TABLE>
The components of net assets at December 31, 1994, are as follows:
<TABLE>
<S> <C>
Capital paid-in (unlimited number of shares authorized).......................................................... $208,427,624
Undistributed net investment income.............................................................................. 84,996
Accumulated net realized loss on investments..................................................................... (7,289,006)
Net unrealized depreciation of investments....................................................................... (16,441,972)
------------
NET ASSETS....................................................................................................... $184,781,642
============
</TABLE>
16
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
John Hancock Tax-Free Bond Fund
We have audited the accompanying statement of assets and liabilities of
John Hancock Tax-Free Bond Fund, formerly Transamerica Tax-Free Bond Fund,
including the schedule of investments, as of December 31, 1994, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of John Hancock Tax-Free Bond Fund at December 31, 1994, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights
for each of the indicated periods, in conformity with generally accepted
accounting principles.
Houston, Texas
February 3, 1995
17
<PAGE> 19
FUND INFORMATION
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
OFFICERS
Edward J. Boudreau, Jr., Chairman and
Chief Executive Officer
Robert G. Freedman, Vice Chairman and
Chief Investment Officer
Thomas M. Simmons, President
Anne C. Hodsdon, Executive Vice President
James B. Little, Senior Vice President and
Chief Financial Officer
Thomas H. Drohan, Senior Vice President and Secretary
Warren Schmalenberger, Senior Vice President
James K. Ho, Senior Vice President
Andrew F. St. Pierre, Senior Vice President
B.J. Willingham, Senior Vice President
Frank Lucibella, Vice President
James J. Stokowski, Vice President and Treasurer
Susan S. Newton, Vice President and Compliance Officer
John A. Morin, Vice President
Thomas J. Press, Vice President and Assistant Secretary
TRUSTEES
James F. Carlin
William H. Cunningham
Charles L. Ladner
Leo E. Linbeck
Patricia P. McCarter
Steven R. Pruchansky
Norman H. Smith
John P. Toolan
DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
TRANSFER AGENT
The Shareholder Services Group, Inc.
P.O. Box 9656
Providence, RI 02940-9656
1-800-343-6840
This material is not authorized for distribution unless preceded or
accompanied by a current prospectus.
The performance information referred to in this report is historical
and does not represent a guarantee of similar future results. The investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
IMPORTANT TAX INFORMATION
No portion of the distributions during the fiscal year qualifies for
the dividend received deduction.
The income dividends paid during the year ended December 31, 1994 were
reported to shareholders on Form 1099 in early 1995. 18.2% of dividends paid
were from sources subject to alternative minimum tax (AMT) provisions. Please
consult your tax adviser to determine how this information impacts your
personal tax circumstances.
18
